Market Failure - Tackling the problems of sugar sweetened drinks

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applying market failure to obesity

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Tackling the problems of sugar sweetened drinks:

Tackling the problems of sugar sweetened drinks Market Failure

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Sweetened drinks with high sugar content and a high calorific value are linked to obesity. Some consider them to be demerit goods. It is also suggested that they may give rise to negative externalities. Milk, a possible substitute, on the other hand, is sometimes thought of as a merit good based on the health benefits that drinking it offers. Sugar-sweetened drinks raise the question about the need for government intervention. In July 2010, in the light of a prediction that the continuation of current behaviour would result in 86% of American adults being overweight or obese by 2030, a report by the United States Department of Agriculture considered a policy of taxing sugar-sweetened drinks. The conclusion of the report was that a sales tax that raised prices by 20% would be an effective way to reduce consumption of sugar-sweetened drinks. In deciding this, the report identified the price elasticity of demand for sugar sweetened drinks as -1.26 and included a diagram (Figure 1) to show the outcome of the imposition of a tax. In 2009 taxation of sugar-sweetened drinks in the USA was typically at low rates and relatively ineffective. In 33 states taxes were at an average rate of 5.2%. Missouri, Virginia, and Utah had the lowest tax rates at less than 2%, while the highest rates (7%) were levied in Indiana, Mississippi, New Jersey, and Rhode Island .

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